TNAG-0456-FCO40-521-Reports-and-accounts-of-Exchange-Fund-of-Hong-Kong-1974 — Page 7

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CONFIDENTIAL

9. This is no more than to say that nothing can or should be done to the financial system which will give carte blanche to any development programme, no matter how well-intentioned it may be. There must be a balance of some sort between those who see a need to spend more and those who see a need to spend less. You don't eliminate the inherent tension by changing the system, or even by changing the Financial Secretary.

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10. What is in principle possible is that there should be a full understanding of what the costs, benefits, and risks may be; so that a judgement can be made (and it must in the end be a political judgement) on where the best interests of Hong Kong lie. It seems clear that this process does not work at all well in Hong Kong. Indeed if you have on the one side someone who professes that he does not understand these things (and, frankly, does not seem disposed to try) and on the other some- one with a very full measure of confidence in his opinions and judgements (who, again frankly, seems little disposed to recognise that there may be more than one view), you have a recipe for the sort of vague but deep suspicion which both sides now confess to. 11. I am afraid that all I can suggest in present circumstances is that the Governor should continue to plug away and make a genuine attempt to reach a fully-informed view. As he thinks that his programmes are very important for Hong Kong, he must require to be convinced that they cannot be implemented. If he is faced with some piece of doctrine which he does not understand, e.g. that it is essential for confidence that a very high proportion of the note issue is covered by holdings of foreign exchange, he should question it. If he is told that that is the way the Exchange Fund operates, why does it have to operate in that way. What do other countries do; and what are the pros and cons of doing things in a different way?

cannot be denied.

And so on, and on. That this is an uphill task

And I fear that it is also true that there is a substantial body of opnion in Hong Kong who can sniff dangerous radicalism even in the Financial Secretary.

24 July 1974

c.c.

Sir D Watson

Mr Male

Mr

Mr Crowson

CONFIDENTIAL

D G Holland